What a night on the markets. The London Stock Exchange goes “down” for three hours due to a technical glitch, and once trading resumed it finished the day “down” more than 3%.
Ouch!
On top of that Dubai kindly let everyone know that it’s in a spot of bother. You can imagine the conversation:
“Er, you know all that cash we borrowed to build those fancy pants buildings, well, there’s a glitch, ha, ha, ha. Any chance of extending the repayment deadline? We’re still good for it Guv, honest!”
And the Aussie market is taking a pasting this morning too. All I can say is I’m glad we recently recommended to Australian Small Cap Investigator and Australian Wealth Gameplan subscribers that they start using trailing stop orders.
Of course the market could still bounce from here if investors put their rose tinted glasses back on again, but it’s all about managing risk and being comfortable with the risk you’re taking.
Anyway, there’s not much more commentary we can add to the stock market today, so we won’t even try.
In fact, it’s not even the stock market we should be looking at – not directly anyway. It’s the banking sector and by extension, the property market that’s the real key to this.
Look, we’re no expert on Dubai. And we’re not an expert on Dubai property.
Actually, we’re not even an expert on the Australian property market either. But we do know a massive real estate debt bubble when we see one.
In fact, one thing we can see from the Dubai debt meltdown is a parallel with the Australian property market. Not that the property spruikers here will see any parallel. They’ll continue to claim the Australian property market is different.
And that Australian property prices will keep going up and double every 7-10 years.
Well, we’ll let them carry on with that argument while we laugh from the sidelines.
But let’s take a look at the basics of what’s happened with Dubai…
In a nutshell they had all these projects they wanted to build. You’ve probably seen the photos of all the lovely shiny high-rise buildings and especially the Dubai World project that had apparently attracted rich and famous buyers from Hollywood.
Trouble is, these building projects don’t ask for all the cash up front from buyers. When the rich and famous buy the $5 million property in Dubai World they’re naturally not going to hand over the cash up front.
They’ll hand it over in stages or at the end of construction, just like they do here.
So the builders have to get financing from somewhere in order to build and finish the project and then pay back the financing once the rich and famous hand over the cash.
That financing is of course debt. It’s bonds issued by the company to investors with the promise to repay the debt in the future.
Well, how do you think the Australian property market is funded?
Now, the property spruikers will trumpet the tired line that Australia hasn’t had the massive overbuild of properties that they’ve had in Dubai and the United States.
Because here we have a “property shortage.”
Clearly the property spruikers haven’t paid a visit to the Gold Coast or Melbourne’s Docklands and Southbank recently.
If they had they’ll have noticed the glut of high rise apartment buildings.
Anyway, we thought we’d do some snap research on Melbourne’s Docklands and Southbank suburbs. The research revealed some quite interesting stats. Make of them what you will.
But to me it hardly points towards a safe and sustainable property market. Anyway, make your own mind up.
According to the 2006 Census there were a total of 2,671 properties being rented in Southbank and 1,413 in Docklands.
For Docklands that represented 64.5% of all residential properties in the suburb, and 54.8% of all properties in Southbank.
That probably doesn’t sound too disturbing, but let’s take a closer look.
A quick search on the property website www.domain.com.au reveals there are 209 available rentals for Southbank and 90 available for Docklands. In other words, it puts to bed the claim about a tight rental market.
Supposedly the rental vacancy rate is only about 2%, well according to these numbers it’s 7.8% for Southbank and 6.3% for Docklands.
That’s hardly what you’d call a rental crisis.
But that’s not the half of it. And this is where we return to the matter of debt, and how the Australian market is inextricably linked to it.
In these two hotbeds of leveraged rental properties, in Docklands only 5.6% of the dwellings are fully owned owner occupied. 11.9% are being purchased with a mortgage and we dare say the vast majority of the 64.5% rental homes are also funded by debt.
As for Southbank the numbers are only slightly better, with 12% fully owned, but still there are 16.3% with mortgages and of course the majority of the 54.8% of rental properties would be hocked to the eyeballs.
Again it puts to bed the lie that only 30% of households have a mortgage. Funnily enough they always conveniently forget the mortgages held against super leveraged investment properties.
In the case of these two suburbs it’s more like 60-70% of homes that are mortgaged.
All that debt has to be funded from somewhere, and it sure isn’t from the suckers who put their hard earned cash into ’savings’ accounts thinking that the bank will take care of it for them.
Because don’t forget that Australian banks’ exposure to residential mortgages is around 50% of their ‘assets.’ And much of the funding for those mortgages (the liabilities on a bank balance sheet) comes from issuing bonds to overseas investors.
The disaster for the banking sector would be if those funds started to dry up. After the hit investors have taken on US and European property, and now middle eastern property, can we really expect investors to risk getting bitten a third time?
Think about it, if you’re an investor in a shiny office in Frankfurt, Los Angeles or Madrid, would you really be keen to throw a whole bunch of money towards a property market that is at its peak?
Will they heck as like!
At the very least they’ll want the government to guarantee those bonds, so expect the taxpayer to be put on the hook again as the leveraged debt binge ramps up even further.
But even that can’t last forever.
We’ve warned for some time that the global economy and the Australian economy aren’t as rosy as the pollies and central bankers and mainstream commentators would have you believe.
The side effects of the burgeoning debt around the world were always going to blow the top off many economies at some time.
Is this the moment? Who knows, we don’t that for sure. So all you can do is take educated guesses and make sure you’re prepared for the worst.
Or you can just forget about it and follow the advice of Michael Pascoe and Peter Switzer and leverage yourself up to the ‘miracle’ Australian economy.
Good luck with that!
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 finished the day lower by 13 point to 4,708.60 despite the strong in the morning. Around the world last night saw big falls on the international markets due to the Dubai Debt story. As a result the Aussie market has dropped dramatically this morning.
The US market was closed yesterday due to the American Thanksgiving holiday.
In the UK, the FTSE100 took the Dubai news badly, losing a massive 170 points or 3.25%, closing to 5,194.13. The London Stock Exchange had to suspend trading mid morning due to technical problems.
The Nikkei ended in the red, closing to 9,383.24, down by 58 points.
The price of spot gold in Australian dollars is trading at $1,306.20, while in US Dollars it is trading at $1,192.28.
The price of silver in Aussie dollars is $20.44 and in US Dollars it is $18.66.
The Aussie dollar versus the US dollar is trading at USD$0.9135, and against the Japanese Yen JPY79.08
Crude oil closed at USD$76.23
For the biggest movers on the market yesterday click here…
{ 46 comments… read them below or add one }
YAAAWWWNNNN …. Somebody wake me when house prices collapsed.
LOL cb – i dont think anyone will need too – the loud ‘bang’ should do a good enough job
anyone know why the Yen is strengthening against the USD while every other currency is weakening???
I know, GB, you are right. There is just so much misinformation around that one cannot really tell anymore what is what. Most information is suspect, stats are manipulated, the books are cooked, experts contradict each other. What is a clueless poor bugger to make of it? I don’t know if we are going to have a property crash over here, but I certainly agree that the economy is more than fragile and if that weren’t enough, we have heaps of idiots working away at undermining whatever stability and hope we have got left to maintain some semblance of prosperity. And these are no lesser lights than our very own moneysqueeze man and the babyfaced fairy ruddfather who is busy demolishing the nation’s credit card while trying to rip out billions and and billions from the economy through this idiotic carbon tax. Since when has carbon become a pollutant? With people like these to lead the country, who needs an enemy, and what chance do we have?
no clue. the only thing that comes to mind is that the yen might still be an originating currency for the carry trade, so it might just be doing the same thing as the USD, just running faster. It is all relative, but did you notice the jump in the AUD price of gold?
yep, the AUD weakened about 2.3% and AUD gold is up about 1%
I just need that decimal point to move one spot right…..
Well, GB, that can very easily happen. All it would need at this stage that the AUD tanks against the USD ahead the USD gold price, and voila! And that, as we saw it before, is quite likely.
will be very interesting to see if CBA had any exposure to dubai world!!! ANZ said it had none but westpac, cba and nab have said nothing so far – you could assume that they have
may explain why cba and westpac had to tap the gov guarantee?
the markets were watching sales on black friday in the US before the dubai problem so i bet they have ‘record sales’ on black friday
it wont be record turnover but record sales and the markets will go back up. they would have sold 1 shirt for $10 last year but this discounted the shirts to $3 and so sold 2 this year so they have record sales
Mmm – there are lies, damned lies and statisitcs.
Its amazing what you can do when you compare apples with oranges.
Kris how can you possibly come up with a current vacancy rate using current rental vacancies with the number of properties available to be rented using a figure from the 2006 Census?
Surely my eyes do not deceive me. How many new apartment buildings were built over the past 3 years in Docklands and Southbank? (with many more still under construction and even more in the planning stage).
Wouldn’t this have increased the total number of apartments that are currently available to be rented?
Would it then not follow that the current vacancy rate will be lower than that claimed by you? (e.g. 209 current vacancies in Southbank divided by a much higher number of current available apartments – i.e. that is to make it totally clear, a November 2009 figure as comapred to your 2006 Census figure)
This puts a huge flaw in your arguement.
Also how can you possibly apply a broad brush on vacancy rates based on 2 suburbs – in one city? (such a large sample!)
No logic here Kris – you can fool some (most?) of the people………
I guess you wanted to prove a point about vacancy rates so you picked some statistics to try and prove it – nice try!
I think that there are a number of issues with the yen:
1.) The carry trade. I thought that the USD had become the de facto source currency for the carry trade but I’d imagine the yen is still prominent.
2.) Much of Japan’s private savings is invested offshore. Whenever there is any kind of financial shock, the yen is repatriated as Japanese investors are notoriously sensitive to financial shocks. It seems to play out like this every time.
That’s a rather simplistic take on things,.
“”"”"”"”"What a night on the markets. The London Stock Exchange goes “down” for three hours due to a technical glitch, and once trading resumed it finished the day “down” more than 3%.”"”"”"”"”"”"”"”"”"”"”"
i say big deal 3% ..wow thats a real lot down ………….
or is that the beginning…….
the hors’de’vures…………………………………………….
“”"”When the rich and famous buy the $5 million property in Dubai World they’re naturally not going to hand over the cash up front.They’ll hand it over in stages or at the end of construction, just like they do here.”"”"”"”"”
$5 mill “????????????????? is a pi55 in the bucket for the likes of
Bruce Willis ,Oprah,Nicholas Cage ,Jack Nicholson dare i say KYLIE MINOUGE
mate for people like them folks, they can afford a min. 25% tip ALSO
its fickle money 4 them & if worse comes to worse its just
a TAX RIGHT ORF
Does this mean the RBA will not raise the interest rates next week because of the Dubai debt problem?
etch – actually Nicholas Cage is in a spot of bother with his housing purchases, he should have asked Kylie to manage his portfolio.
GB – I keep listening for that bang – but not yet a whisper…..
Are you sure that your not just being influenced by the mantra.
Check this one out –
Forget the doom and gloom market commentators…
here’s your chance to keep making
CA$H in the
Bull MARKET!
Wonder where that is from????
Talking of Dubai debt, and what it means for gold and the global context, this is right on the topic.
http://www.youtube.com/watch?v=cSWSwhn-AWc&feature=player_embedded
Would anyone care to comment about Australia’s very own 20 Trillion dollars worth of OTC (over the counter) derivatives mentioned in the second segment of this weekend’s On The Edge interview?
http://maxkeiser.com/
What are these exactly, and who holds them against who? I assume that since these are supposed to be OTC derivatives, they are not futures and CFDs, as those operate in the open markets. Are these the sort of rubbish investments sold to local Councils and Australian private hospitals we have been hearing about? If they are, who else is holding 20 TRILLION worth of these investments and bets?
Who is exposed here? More local councils?
What about our banks?
Our Mutual Funds?
How about our Superannuation Funds?
And, perhaps even more importantly, if and when these start blowing up, who is going to be skinned for them? Who will pay for them?
Will it be the Aussie Taxpayer, like in America? What is going on?
PF – i am being influenced by sanity and fundamentals instead of testosterone like property/market bulls
I noticed your banking buddies haven’t yet disclosed their exposure to Dubai World! ANZ came straight out and said they have none
Where is CBA, NAB and Westpac??? I do know that Leightons has a massive presence in Dubai – who lent to them???
etch/PF
HAHAHAHAHA brilliant!!!!! You go tell all those celebrities to snap up Dubai World property then…
Prices are down 50% and still falling and the state could default
WOW – you must be real good spruikers to convince them to invest in that
i think the lyrics from Shampoo (I think) should be made the global anthem
‘Uh-oh, we’re in trouble, Something’s come along and it’s burst our bubble yeah yeah’
GB 11.28.09 at 11:32 am
“”"”"”"”"”"”etch/PF
HAHAHAHAHA brilliant!!!!! You go tell all those celebrities to snap up Dubai World property then…
Prices are down 50% and still falling and the state could default
WOW – you must be real good spruikers to convince them to invest in that”"”"”"”"”"”"”"”"”
no probs ,,the those peoples i mentioned are the type that i’dASSSSSSSSUUUUMMMMMMMEEEEEE
could/would/did buy into DUBBBY
maybe ophrah will have to make a 5 part –1 week segment out of this “”"”"debacle in the DUBBBBBY” & CONJURE UP SOME DONATIONS
i cant help em ,,except tell em someones pI55ed IN THEIR GLASS & ItS not lager BEER
thanx cb
just really makes u wonder whos driving this economy the way it is & why????
BUSHeS nephew????????
http://www.youtube.com/watch?v=cKNzEvK_5u8&NR=1&feature=fvwp
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
On an ocean of debt we all float
And an ocean it is, no moat
With compass destroyed and charts in tatters
And all in charge saying: ’tis not what matters
Clasp yer things, lest they be lost
And sit tight down there, while the hold is locked
To prevent stampede and a run on the life boats
Should the ship sink, we’ve not enough floats
The boats will be needed to rescue our treasure
Which we’ll need to serve our pleasure
CB, well said about the misinformation out there.
In Sunshine Vic where I live 3 car dealers have recently gone broke, the largest new car yard has no where near the amount of new cars it used to have and a bloke at work I know who is an expert in the car area reckons that some other yards that have been around 20+ years are about to go broke. You cant buy for love or money a decent used car. Everyone is keeping them. Not the signs of a robust economy.
This weekend’s property sales was the 2nd largest sale by amount (just 5 mil short of the record) in Melbourne. People are buying the story that Australia lucked out. How do we use that? By getting further into debt. The evidence I see does not support the story put out by the financial reporters, who do not investigate a thing, that the economy is good. People are buying the buy a house and make your fortune story.
The supply and demand side of property is fluid and people will make adjustments in hard times such as living in tents, caravans, sharing or living further out in the suburbs. If unemployment gets high enough or if prices get high enough the demand goes away.
Kevin B – Yes, of course. That is precisely what prices are supposed to do in a free market: to create an equilibrium point between supply and demand, so that there are no shortages and people do not waste their time in queues.
Talking about misinformation, how about Rudd not telling the people that in being so eager signing us up in Copenhagen, he will be committing us to some 7 billion dollars annual contribution to a UN controlled climate control fund? Hmmmm……. That is probably hundreds of dollars for every one of us breathing CO2 (in and out).
I was thinking, if these nitwits want us to believe that they can prevent climate change, why don’t they silence all their sceptics by simply railing against and stopping a local thunder storm in its tracks?
And once they have mastered that, they could have a go at the tide.
Both should be child’s play by comparison.
cb..Xerxes, the ancient king of Persia, tried stopping the tide 2,500 years ago. Didn’t work then. Doubt it can wok today. Maybe if he waited long enough, climate change could have done it for him????
You know, he really could have done it! All he had to do is TAX it!!!!
Interesting comments guys. I like a debate which appears to lack the agenda of your average property spruiker.
I live and work in Brisbane as a property buyers agent and look across the property spectrum. Of course, each segment of the market has it’s own risk profile and different growth drivers. What stimulates the market for home owners, investors in apartments, developers, commercial property owners are different (including sources of funding) although there are also linkages between them.
I’m in Melbourne at the moment and the story is quite different to Brisbane – vacancy rates do look higher than they should be, especially on apartments. Could it be the interstate migration patterns are causing some pain in the market?
By the way, I’d be interested in a survey of the average Australian’s understanding of what’s happening in Copenhagen. Based on what I believe is a high level of ignorance, I’m pleased to see this issue raised in as many forums as possible. Apart from Australia’s financial commitment, I’m also concerned about who will be REALLY making the decisions for this planet in the future, what is their REAL agenda and what’s our risk profile (looking not only at the impacts on our current market, but looking to the future and our ability to control our destiny as a nation – sounds like the thin wedge to me).
A word of caution: be careful with your comments about controlling tides and thunderstorms. I and most people reading know you’re kidding, but the good folk in Canberra must might chase them as plausable ideas and spend a few hundred $m to find out!
discombobulated – Love it, Leonard at his best. I’m a BIG fan actually.
Check out the lyrics for “Gods away on Business” by Tom Waits if you like gloomy pieces.
Much more fun than economics.
lol, Nick. It took all of two and a half millenia of liars, damn liars and statisticians, not to mention climate change modelling geeks to dream this stuff up. But they have big money behind them, the UN, The IMF, the BIS, Goldman Sachs, Al Gore, George Soros, etc., and in Australia Krudd and Turnbull are amongst their men. These bastards have been vilifying and marginalising reputable and honest men, including scientists of good repute, in their mad power grab through world government and a massive energy tax on EVERYTHING, and the power to fine countries, such as ours, if we produce more carbon dioxide than our allocated quota in order to keep our lights on and factories running.
The insanity is going so far that the scientific record is being denied and falsified. It is a long established fact, and widely documented record that, if anything, CO2 levels are determined by global temperatures, rather than the other way around, but these bastards are so stupid and so arrogant that they will try to force on us a government and tax system with a justification that contains a school boy’s error in the so-called underlying justificatory “science.”
If they succeed, science itself will continue to be systematically falsified and even brutally surpressed, taking things back to the times of Gallileo and Copernicus. For someone knowledgeable about what drives global warming and cooling trends, namely, cyclical variations in Earth’s trajectory around the sun, must be looking at this madness with total bafflement and incredulity.
But most genuine scientists are not interested in political activism, and when employability and livelihood is threatened, most can be silenced and will acquiesce. This is how big money, through the use of bribes, lying and outright intimidation, is trying to secure for itself the dream of global control and income stream that is the stuff of fairy tales at our expense. It remains to be seen whether their hijacking of the liberal party through Turnbull, will succeed in demolishing the last realistically effective obstacle to their plans here in Australia.
LOL – Rismark do it again!! I have pasted a quote by the boys below. In summary, Prices have risen but sales are falling but the absolute classic comment in the whole story is ”The strong growth figures…” SO THERE IT IS IN BLACK AND WHITE… Rismark talk about strong growth not as in ‘more houses being built and sold’ but strong growth in prices…. HAHAHAHA what a bunch of morons and yet they have such a strong following
‘The rise in home values comes alongside data indicating a softer recovery in the home building market, with new home sales falling for the second month in a row. ”The strong growth figures throughout October after a slowdown during September show that the market is very resilient and that the 25 basis point interest rate increase during the month has not immediately impacted the market,” Mr Kusher said.
cb – you mentioned previously that there is no real definition of a bubble well what about this:
“fewer people chasing higher prices”
Thanks, GB. I guess, what I am trying to say is that the concept of a bubble is too ill-defined at this point. It means different things to different people, and there appears to be no consistent, dominant usage for it. Rising prices alone, do not constitute a bubble, I would grant that when we see fewer and fewer people chasing higher and higher prices, then it might be a symptom of a bubble, a sign, and indication, and yet not constitute a bubble in and by itself.
For example, if after a while prices level out and flatline for the next 15 or so years, with no significant price crash, then would you say that the period where fewer people were chansing higher prices was a bubble, which now no longer exists, or rather that the bubble is still there waiting to burst? If the latter, would you still say the same thing if wages had doubled from current levels against stagnating house prices?
This would not be plausible, it seems, but the whole concept is still unclear to me. Not sure if I am addressing your suggestion properly. Your thoughts?
Hello Martyn. You are right, they are just the sorts of things idiot bureaucrats are likely to build their careers on.
My guess would be that the average Aussie has next to no clue about what the impacts will be in terms of prices. Krudd proposes to compensate most households, apparently, for higher direct electricity prices (even though people will be likely to be short changed more and more as time passes, as with any government assistance and payment), but that will do nothing to compensate us for the higher costs of production which will be passed on through all the goods we buy, through increased transport costs, etc. And that isn’t even touching on the .7% of GDP annual contribution to the UN fund to pay unelected bureaucrats who will police our emissions and impose million and billion dollar fines for keeping our lights on and cars running. Check out this blog by Andrew Bolt on the issues. Bolt writes:
“Remember that this is just a downpayment on the true cost of this mad tax. You won’t just pay higher power prices. You will also pay more for everything that needed electricity, too – processed foods, clothes, cars, steel, concrete, train rides… You’ll need to pay more for the people who will lose their jobs because of this tax. You’ll pay more for the uneconomic “green” power we’ll be forced to use instead of cheap coal-fired power. You’ll pay for the gassy companies demanding compensation for going broke. You’ll pay for the billions Kevin Rudd is spending overseas to bribe pooer countries to cut gases, too.
You’ll pay. I suspect you’ll one day make Labor pay, too. And make the Liberals pay who said this great green tax on everything was a good idea – because they did not dare say no.”
Reference: http://blogs.news.com.au/heraldsun/andrewbolt/
And this is excerpt from from a good overview of the scam, and the degradation of science through this climate hysteria, where big money saw an opportunity, and succeeded in damaging the very name of science.
“The climatology story is no different. Environmentalist Greens needed a threat — one that menaced not only technological civilization, but life on earth itself. They have promoted an endless parade of such threats since the 1960s — overpopulation, pollution, runaway nuclear power, and global cooling — only to see them shrivel like old balloons. They required a menace that was overwhelming, long-term, and not easily disproven. With global warming, the climatologists gave them one. In exchange for sky-high funding, millennial scientists — the heirs of Bacon, Copernicus, and Einstein, men who bled and suffered for the sake of their work — continually inflated the nature and extent of the CO2 threat by using the sleaziest methods available, as we now know. The result has been complete intellectual degradation.”
http://www.americanthinker.com/2009/11/global_warming_fraud_and_the_f.html
Year Annual Salary Median House Price
Jul-98 $37,768 $142,000
Jul-09 $62,218 $470,000
Increase 65% 231%
There is a bubble there. Second proof is in the number of sales per month. During the boom it peaked close to 3000 per month but since 2006 has fallen below long term averages. During this period from 2006 supply has been booming.
Also, you just shot down the property market. If you claim that if it sits flat for 15 years without a price crash then that is not a bubble. Doing the math on it shows it will take 15 years at 5% per annual growth in wages and 0% = ZERO% increase in prices. So why would you buy property – you might as well put your money in a term deposit and buy a house in 15 years. REMEMBER house prices must remain at 0% per year so CANNOT increase at all even when considering inflation.
Chances of 0% price increases with booming population, easy credit and government support? Nope… so the bubble will continue to grow. Chris Joye will continue to champion a booming property market based on prices instead of the laws of supply and demand (then blame economists when it goes wrong) Prices will rise, sales per month will continue to fall and supply will continue to increase….
I will stick to my theory that when China slows down (buying our resources etc…) then cracks will begin to appear in the Australian property market
ccccrrrrraaaaccccccccccccckkkkkkkkkkkkkkkkkkkkkkkkkkkkkkk!!!!!
heres my little poem ?// ode??/
“see thet little thing over thar ?”
“why yes i do” sir ,yes i do .& and wat is it?”..
“well holy tuna-crap its DUBAI”
“and say good-bye”
Hey, GB. Good arguments. I would just like to complement it with something surprising, if not counterintuitive. You asked whether there would be a point in buying a house now, as an investment if you knew that for the next 15 years its face value would stay flat, while there was, say, 5% pa wage increases, which were simply keeping up with overall inflation in terms of living costs, similar to what is being measured in a manipulated and doctored way by the CPI. So, these are our assumptions then:
1. Buy a house with, say, 100k down and borrowing an additional 400k.
2. Sell it after 15 years for the same price, 500k.
3. Inflation during that time runs at 5% pa, and wages more or less keep up with it.
And our question is whether under such circumstantes it could possibly make sense to put your savings of 100k into this investment, as opposed to leveraging it up and buy an investment property, as discussed, instead of sticking your 100k into a bank account and earn interest on it at, say 5% pa.
Before I deal with the question in more detail, I should ask you whether you are satisfied that the scenario is more or less realistic in terms of likely inflation and interest rates to make it worthy for the exercise. So, I will stop here to see whether you would like to make any changes to the setup.
cb
inflation 5%
wages go up with inflation at 5% = no real gain
term deposit makes 5% per annum =no real gain
house prices 0% (NO INFLATION) = -5%
if you adjust house prices and wages for inflation by the same amount then it will take more than the 15 years mentioned in my last post, i.e. it will take eternity and then some as they will never return to long term averages
but its irrelevent because spruikers will always believe that property prices can grow at 10% while wages, which is is the only way to pay for the ‘property price’, grows at 5% for ever and ever and ever and ever…. because they truly believe the loan size doesn’t matter
Once again I will challenge the spruikers to prove me wrong mathematically. I will try an new approach. Below is a table that begins in year 1 with an annual salary of $1 and a loan of $8. This represents the difference between the average salary and the median house price (8x). It supposes that they borrow 100% which is irrelevant as its just to prove that salary and price must rise together to be sustainable. You can see that it takes 13 years before the loan, growing at 10%,
completely dissolves the entire wage which is growing at 5%
Years Salary Loan Repayments Balance
1 $1.0 $8.0 $0.6 $0.4
2 $1.1 $8.8 $0.6 $0.4
3 $1.1 $9.7 $0.7 $0.4
4 $1.2 $10.6 $0.7 $0.4
5 $1.2 $11.7 $0.8 $0.4
6 $1.3 $12.9 $0.9 $0.4
7 $1.3 $14.2 $1.0 $0.3
8 $1.4 $15.6 $1.1 $0.3
9 $1.5 $17.1 $1.2 $0.3
10 $1.6 $18.9 $1.3 $0.2
11 $1.6 $20.7 $1.5 $0.2
12 $1.7 $22.8 $1.6 $0.1
13 $1.8 $25.1 $1.8 $0.0
GB – Wages increase with productivity, not inflation. Use your maths skills and do some calculations on productivity increases.
GB – “new home sales falling for the second month in a row”
NEW HOMES – not total homes. And an underproduction of new homes creates undersupply, and that creates higher PR_ C_ S.
Go on fill in the blanks.
GB – I do not follow you, but it would be good to pin this scenario down. We want to find out whether one could be better off over a 15 year period where there was no capital gains for a 500k investment property, as opposed to sticking one’s available savings into a bank account and earning interest on it. Are you happy with these assumptions then:
1. Buy a house with, 100k down and borrowing an additional 400k.
2. Sell it after 15 years for the same price, 500k.
3. Inflation during that time runs at 5% pa, and wages more or less keep up with it.
4. As an income producing investment property, the house brings in 5% ROI in the initial year and is adjusted upwards in subsequent years in line with the CPI, which, say, runs at 3% per annum, which would be a whole 2% less than the real rate of inflation and nominal wage growth we are assuming, giving a real deal for the tenant, whose accommodation will be getting cheaper relative to their income every year.
Based on these assumptions, we want to find out whether an investor would be better off putting their 100k in savings into a property as described, as opposed to simply keeping it in the bank and earning 5% interest on it per annum.
Can you do the two sets of calculations and see which option would be better, and by how much? For the sake of completeness, assume that the house is paid off with the rent and from current income during that 15 year period in the one case, and that the same amount of cash is put aside into the bank account by the saver. They both pay taxes, of course, on any interest earned, as that is part of the investment landscape.
PF – people ask for an increase in salary as a minimum of inflation, the cost of living increases by 2% then they want a 2% pay rise
cb – dont worry about it, as i mentioned property bulls are oblivious to the loan side of the argument.
GB – Wait. I am not sure what you mean by the loan side of the argument, but it could be what I was hoping to clarify and demonstrate. And, namely, that in an inflationary environment, the rationality of purchasing a real asset (gold, property, whatever) by means of debt increases in proportion to the expected rate of inflation going forward. That is why I suggested that we assume the house price to stay constrant for 15 years, and then I was hoping to show to you that the 5% annual inflation would dutifully chew up the value of the debt over those years, giving you an unseen, but very much real and tax free benefit.
Anyhow, I am pretty sure that if you compute all those variables into your model, the investor with leverage will come out way ahead of the saver, who simply keeps his savings in cash. And that, even in an environment, that his savings keep pace with inflation, which is a rather generous assumption to make, because in reality banks will never compensate savers for lending them their money in line with the real rate of inflation, as this is the way governments and bankers steal money from savers.
HEATHENS !!!!!!!!!!!!!!!!!!!!
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